RBI’s capital market lending revamp

Source: The post RBI’s capital market lending revamp has been created, based on the article “RBI unlocks capital market liquidity with funding boost at a time markets are flat: Here’s how the measures would work” published in “Indian Express” on 4 October 2025. RBI’s capital market lending revamp.

UPSC Syllabus: GS-3-Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context: The Reserve Bank of India (RBI) has recently announced a series of reforms aimed at revitalising India’s financial and capital markets. These measures are designed to improve liquidity, ease access to credit, and enhance banks’ participation in equity and debt markets. The move marks a significant shift toward integrating India’s banking system more closely with its capital market ecosystem.

Key Measures Announced

1. Lending for Corporate Acquisitions: For the first time, banks are now permitted to finance corporate acquisitions, enabling them to fund buyouts and consolidation deals that were previously out of reach.
2. Higher Lending Limits Against Securities: The RBI has removed the ceiling on loans against listed debt securities. The individual loan limit against shares has been increased from ₹20 lakh to ₹1 crore, and the IPO financing limit for retail investors has been raised from ₹10 lakh to ₹25 lakh.
3. Withdrawal of Curbs on Large Borrowers (2016 Framework): RBI has rolled back the earlier restrictions that penalized banks for lending to very large corporates (systemic exposure above ₹10,000 crore).
4. Systemic risk will now be managed through macroprudential tools, while individual exposure caps will remain under the Large Exposure Framework.

Objectives of the Reforms

1. Boost capital market liquidity: Facilitate greater fund flow into equity and debt markets.
2. Encourage retail participation: By raising IPO financing limits and simplifying access to capital.
3. Strengthen financial intermediation: Improve banks’ role in connecting savings with investment.
4. Enhance credit growth: Revitalize corporate and capital market-linked lending that has lagged behind retail and MSME sectors.

Implications for Banks

1. Credit Growth Revival: The reforms enable banks to participate in acquisition financing, a new avenue that can revive corporate credit growth, particularly in sectors where organic expansion is slow.
2. Level Playing Field with NBFCs: Earlier, Non-Banking Financial Companies (NBFCs) dominated segments like loans against shares (LAS) and IPO financing. The relaxation now allows banks to compete on more equal terms.
3. Re-engagement with Large Corporates: Withdrawal of the 2016 curbs signals renewed RBI confidence in banks’ risk management capabilities, allowing them to re-engage with large industrial groups while maintaining regulatory oversight.
4. Improved Portfolio Diversification: Banks can now expand exposure to capital market instruments like REITs and InvITs, diversifying revenue sources beyond traditional term loans.

Implications for Markets and Economy

1. Enhanced Liquidity: Higher lending limits and IPO financing will increase liquidity flow into primary and secondary markets, supporting fund-raising and investment activity.
2. Support for Corporate Restructuring: Easier access to acquisition finance may encourage mergers and acquisitions (M&A), facilitating consolidation in key industries.
3. Impact on NBFCs: NBFCs may face reduced demand in traditional LAS and IPO financing segments due to increased bank participation.
4. Macroeconomic Stability: The RBI aims to manage systemic risks through macroprudential regulation, ensuring liquidity expansion does not translate into financial instability.

Way Forward

1. Robust Risk Management: Banks must strengthen due diligence and risk assessment frameworks to avoid concentration risks in large corporate lending.
2. Balanced Regulatory Oversight: RBI should ensure that enhanced liquidity and competition do not lead to excessive leverage or speculative activity in capital markets.
3. Encouraging Innovation: Banks should leverage fintech and digital lending platforms to deliver market-linked products efficiently.
4. Investor Awareness and Protection: With higher retail participation in IPOs and capital markets, financial literacy and investor protection mechanisms must be enhanced.

Conclusion

The RBI’s capital market lending revamp represents a calibrated liberalization aimed at integrating India’s banking and capital markets. By expanding banks’ participation in securities-based lending and acquisition finance, the reforms are poised to boost liquidity, corporate activity, and financial depth. However, maintaining prudential norms and ensuring responsible lending will be crucial to sustain stability alongside growth.

Question: Examine the recent measures introduced by the Reserve Bank of India (RBI) to enhance liquidity in capital markets and their likely implications for banks and the broader economy.